Court Of Chancery Holds That Corporate Officers Owe Duty Of Oversight In Sexual Harassment And Misconduct Case

• Published date: 14 March 2023
• Subject Matter: Corporate/Commercial Law, Employment and HR, Directors and Officers, Discrimination, Disability & Sexual Harassment
• Law Firm: McDermott Will & Emery
• Author: Mr Nathan E. Barnett, Ethan Townsend, Thomas P. Conaghan, Benjamin Strauss and Marina C. Leary

On January 25, 2023, the Delaware Court of Chancery held, for the first time, that the rationale for a duty of oversight (Caremark duty) owed by directors of Delaware corporations applies equally, if not to a greater degree, to officers. In re McDonald's Corp. Stockholder Derivative Litigation, C.A. No. 2021-0324-JTL (Del. Ch. Jan. 25, 2023).

However, this officer duty of oversight will be more context-driven than the duty owed by directors. Some officers, like a chief executive officer or a chief compliance officer, will have company-wide oversight duties while other officers with more constrained areas of responsibility will have a more constrained duty of oversight (i.e., establishing information reporting systems and upward reporting of red flags will be based on the particular officer's responsibilities and authority). Additionally, as with a director's duty of oversight, oversight liability for officers will require a showing of bad faith, meaning a plaintiff will need to establish that the officer consciously failed to make a good faith effort to establish information reporting systems or consciously ignored red flags.

FACTS AND HOLDING

McDonald's Corporation stockholders asserted derivative claims against the board of directors and certain officers of McDonald's, including David Fairhurst, who served as Executive Vice President and Global Chief People Officer from 2015 until his termination with cause in 2019. Fairhurst was the head of human resources and was the executive officer with day-to-day responsibility of ensuring that McDonald's provided its employees with a safe and respectful workplace. During his tenure at McDonald's, the stockholders alleged that Fairhurst breached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct. Specifically, the stockholders asserted that Fairhurst breached his duty of oversight by failing to exercise adequate oversight in response to risks of sexual harassment and misconduct at McDonald's. The stockholders also alleged that Fairhurst himself committed acts of sexual harassment while employed at McDonald's.

Fairhurst moved to dismiss the stockholders' claim that he breached his duty of oversight and asserted that Delaware law does not recognize a duty of oversight for officers. In denying the motion, the Court held that officers have the same fiduciary duties as directors, including the duty of oversight. In Caremark (In re Caremark International Inc....